Chapter 13 Measuring the Economy’s Performance

1. Chapter 13 Measuring the Economy’s Performance Why do we need to know how the economy is doing ? - To ensure a healthy economy and high standard of living - To make adjustments as needed What do we measure? - The goods and services produced - Income people have to spend

2. The Big 5 Statistical Measures

3. GDP – Total value of Goods and Services produced annually. GDP = consumption + investment + government spending + (exports − imports)

4. 13.3 Trillion

6. GDP Comparisons World = 60.6T USA = 13.3T European Union = 13.0T

7. GDP Comparisons

8. Problems with Using GDP 1. Economist must make calculations 2. Problem of double counting Components vs. Finished Products Memory chips – No Computers – Yes 3. Used products can’t be counted in GDP Sale of a used car Purchase of a used appliance 4. Sale of goods and services that go unreported Tips Black market goods

9. Disposable Personal Income (DI) Income remaining after taxes are paid

10. Factoring for Inflation Inflation – Prolonged rise in cost of goods and services. Deflation – Prolonged decrease in cost of goods and services. Purchasing Power – Amount of goods and services your money will buy. Consumer Price Index (CPI) Price changes in a basket of goods. 90,000+ items Items changed every 10 years. Base year 1982-1985 1.57 - $1.50 = .075 .075/150 = 5%

11. Producer Price Index (PPI) Changes in price producers charge to consumers. Mining, Manufacturing and Agriculture Early indicator of Consumer inflation GDP Price Deflator Removes effects of inflation from GDP = Real GDP 1996 is base year. $9,963.1 / 106.92 x 100 = $9,318.3

13. Business Fluctuations Boom – Prosperity New businesses open Current factories producing at full capacity Jobs easy to secure Contraction – Slowing of Economy Flat or declining growth Recession – At least two quarters of no growth Depression – Prolonged recession Millions out of work Numerous business failures

15. The Business Cycle

16. US Business Cycle History

17. 25% Unemployment